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As I wrote previously, the Massachusetts Appeals Court recently decided the case of Suominen v. Goodman Industrial Equities, 78 Mass. App. Ct. 723 (2011). In Suominen, the plaintiff was a former construction manager of a small real estate development firm and was promised a share of “overall profits generated by the development efforts.” Suominen argued that this was a commission under the Massachusetts Wage Act, M.G.L. c. 149, s. 148. The panel upheld the trial court’s ruling against Suominen on his Wage Act claim. In the view of the panel, Suominen’s incentive compensation was different than a typical commission, which it defined as a “percentage of the money taken in on sales, given as pay to a salesclerk or agent, usually in addition to salary or wages.” The panel called the compensation at issue a “profit-sharing arrangement.” Since many types of compensation could be cast as profit-sharing arrangements, what will this decision mean in future Wage Act cases seeking unpaid bonuses? Are bonuses be considered wages under the Act?

First of all, there are two ways to read the Wage Act, both of which are logically-valid but completely different. On the one hand, one can choose to take the reference to “wages” in the Act to be a general way of referring to the compensation of an employee. In this view, the universe of covered wages is vast and the specific types of special compensation (vacation, holiday, and commissions) are listed only as part of a non-inclusive list. It’s reasonable that the legislature may have listed some specific types of pay in order to head off controversies without providing an exhaustive list of what would be considered “wages.” In fact, this is the way that the Superior Court in Juergens v. MicroGroup recently read the Act when it ruled that severance pay–mentioned nowhere in the Act–was covered as wages. And it seems to be the majority view emerging from the case law (at least in the state courts).

The second way to read the Act is to consider “wages” to mean only the salary or hourly pay of employees, and the reference to vacation, holiday, and commissions as limited exemptions to the general rule. What is the better reading of the statute? The text is here if you want to give it a try.

There are a few things worth saying about Suominen. First, courts are sometimes reluctant to allow Wage Act coverage for very highly-paid employees. Wage Act coverage enables them to sue for three times their compensation, which in the view of some courts, is more of a windfall than an appropriate penalty. Often these scenarios can feel more like business deals gone awry than traditional employee-employer relationships. For example, Suominen was seeking more than $1 million in damages from a share of the “promote” of several real estate development deal. What is a “promote”? It goes right to the heart of why Suominen lost.

A promote is a term of art in the real estate development world. It’s a manner of compensating promoters of development projects beyond their return on equity (if they invested cash in the deal) and for their personal services in managing the project. The promote is meant to reward a general partner for his or her entrepreneurial role in a project. A general partner must often bring a Promethean-level of effort and resourcefulness to a project to make it succeed, and it makes sense for everybody, including the limited partners, to incentivize this. Moreover, a general partner will often have real skin in the game, like a personal guarantee of project debt or even a mortgage on his home to get the loan for the deal. (By the way, this is a big cause of bankruptcies when a business project fails).

In this case, Suominen was an employee of the general partner (Goodman), the promoter of several real estate development deals. Goodman, as general partner, had negotiated the right to a promote that was 25 percent of the equity upside after invested equity was paid back and received a 15 percent annualized return on its investment. Since Suominen was a key part of the Goodman enterprise–as construction manager he had a big role in the projects’ success or failure–Goodman agreed to pay him about 23 percent of the promote. It is worth noting that Suominen was making a base salary of $225,000 a year during the latter part of his employment with Goodman.

So, why does this matter? The bottom line is that courts do not think it is fair to give an employee with a high salary and a stake in overall business profits Wage Act coverage for his incentive pay. Thus, Suominen’s Wage Act claims failed. Courts would rather leave employees like Suominen to their breach of contract and promissory estoppel claims, so a little judicial interpretation/activism takes place. However, what would happen if a low-level employee was owed only $1,400 as part of a bonus compensation plan and brought suit? Defense counsel would certainly try to use Suominen to win the case. After all, any bonus plan can ultimately be viewed as a profit-sharing plan.

It is very likely that, however, that despite Suominen, a court would rule in favor of the hypothetical employee whose income was tied to regular sales or performance of the company, rather than to a company-level transactions. Bonuses that are tied to sales and related metrics–and not to enterprise-level transactions–are indisputably commissions. The “promote” in Suominen was realized on the sale of a project asset or the refinancing of project-level debt to extract equity appreciation–an entity-level transaction. Apart from scale and the power position of the actors, this is a critical theoretical difference between Suominen and the regular employee entitled to a commission or bonus.

It matters a great deal whether a certain type of pay is covered by the Massachusetts Weekly Payment of Wages Act (“Wage Act”). If a type of unpaid compensation is covered by the Wage Act, an employee is entitled to three times the unpaid amount, attorney’s fees and costs. Commissions and bonuses have been a big source of controversy, but the Massachusetts courts have recently begun to rule more consistently in employees’ favor.

In Okerman v. VA Software Corp., 69 Mass. App. Ct. 771 (2007), the panel held that commissions were covered by the Wage Act as long as they were “definitely determined” and “due and payable,” as set forth in the plain language of the statute. The panel further tightened the noose on employers not paying wages, limiting their ability to be overly clever with commission calculations. The panel made it clear that the “definitely determined” requirement was satisfied as long as commissions were “arithmetically determinable.” Notwithstanding this decision, commissions will continue to be a fruitful area of controversy due to the many scenarios that can arise in the context. For example, it is not entirely settled is whether an employee can be deprived of commission wages that are payable only upon a contingency (such as the company collecting on a sales invoice) that only occurs after the employee has quit or been terminated. If an employee negotiated a purchase order and serviced a sale but was terminated while the company was waiting to be paid, can the employee be terminated and the company retain the commission? This is not a settled question. Depending on the intent of the employer and circumstances, the former employee will have a claim under the implied covenant of good faith and fair dealing, but a common law case such as that lacks something critical, i.e. the fee-shifting and multiple damage provision strongly incentivizing Wage Act claims.

In the aftermath of the Okerman decision, there was a tendency on the part of some employers to re-cast commissions as bonuses in order to evade the requirements of the Wage Act. That missed the mark. Although there is no recent reported case in Massachusetts specifically holding that a bonus is covered by the Wage Act, the prediction of most wage lawyers is that the courts will find coverage. The Massachusetts Superior Court in 2011 in Juergens v. MicroGroup held that the Wage Act even covered severance pay. This is a controversial opinion, but it recognized the liberal scope of wages in the aftermath of the last seminal SJC case on the issue, Wiedmann v. Bradford Group, Inc., 444 Mass. 698 (2005). Commissions are explicitly included in the Wage Act coverage. When bonus pay is based on definable metrics, it shares much in common with commission compensation. In fact, bonuses are usually tied to sales, often of a business unit or entire company. When this is the case, a bonus is just as arithmetically determinable as a commission, and it constitutes part of the employee’s total expected pay. It would make little sense to treat mathematically calculable incentive pay differently based on the name given to it.

However, in Massachusetts Appeals Court in 2011 decided a Wage Act case that will be used by employers to claim that bonus pay is excluded from the Act. In the case of Suominen v. Goodman Industrial Equities, 78 Mass. App. Ct. 723 (2011), the plaintiff was a former construction manager of a small real estate development entity and was promised a share of “overall profits generated by the development efforts.” The plaintiff had argued that this compensation was a commission under the Wage Act. The panel disagreed, stating that it was, in their view, different than a typical sales commission because it was a “profit-sharing arrangement.” Since most bonuses can be cast as a profit-sharing arrangements (though varying widely in scale), I expect defendants will seek to use this case to avoid Wage Act liability for unpaid bonuses. However, Suominen will likely be an aberration: it involved compensation based on an entity-level transaction. Sales commissions and performance bonuses are normally based on the sales of a business, and not a sale of the business itself.

Timing issues will continue complicate bonus and commission cases. I expect to see more litigation on the issue of when an employee earns incentive pay and when an employer can evade payment by claiming funds are not due and payable until after the employee is terminated.

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